(Photo Credit: Free-Photos, Pixabay)The covid-19 pandemic has rippled throughout all facets of business, including the renewable energy market. Experts recently expressed concern about demand dropping off.
To find out more about what’s happening, Environment + Energy Leader asked Jason Tundermann, vice president of business development at LevelTen Energy. His focus is on market expansion, strategic partnerships, product development, and power purchase agreement structuring at the renewable energy marketplace and procurement platform.
Tundermann discussed how the current covid-19 pandemic is affecting corporate procurement in the United States — and the latest on federal renewable energy tax credits.
How is covid-19 affecting the US renewable energy marketplace?
Energy demand and energy prices have dropped dramatically, but the impact on renewable energy projects is not dire. The majority of them have long-term contracts guaranteeing a price for energy. A small percentage of wind and solar projects are what we call “merchant projects” — those without PPAs, and they will be feeling the drop in revenue.
Corporate buyers that previously signed virtual PPAs, and therefore bear market price risk, will also be experiencing increased VPPA settlement costs. At the same time, however, these same corporate buyers would presumably also now experience lower energy bills — which illustrates the potential hedge value of a virtual PPA if structured properly.
The most immediate near-term covid-19 impacts have come in the form of supply chain delays and uncertainty in the financing markets. Some projects in the midst of construction could experience equipment delivery days and labor constraints, which could push back their expected commercial operation date. This could cause them to miss critical federal tax credit deadlines or key delivery milestones in their offtake agreements.
What do you anticipate happening in the future, based on what you’re seeing now?
Looking ahead, reduced economic activity due to the covid-19 crisis could reduce tax appetite from traditional tax equity investors, and market uncertainties tend to have a chilling effect on the project lending community. This is why industry trade groups are pushing so hard for tax credit extensions, cash grant options, and clarity from the IRS on how covid-related delays will be treated.
All that said, from LevelTen’s vantage point, the demand for renewable energy from corporate buyers has remained strong, thanks to their public commitments and stakeholder demand.
So far, corporations have signaled that they are still interested in procuring renewable energy through new PPAs to meet their greenhouse gas emission targets. RFP activity is continuing. In fact, LevelTen just launched its first European RFP for a large energy buyer.
Even though the industry is facing significant energy price reductions and project supply chain disruption, we’re heartened to see the business community maintain renewable procurement momentum. Only a few planned transactions on the LevelTen platform are on pause during the covid-19 crisis, and no buyer has asked to cancel.
The good thing about PPAs is that they are long-term contracts for projects that aren’t expected to reach commercial operation for one to three years out, so short-term volatility does not have a major impact on the value of the deal.
What are the relevant deadlines for federal renewable energy tax credits?
For wind projects to receive the full 30% Production Tax Credit (PTC), they had to start construction in 2016, and have to complete construction by December 31, 2020. For solar projects to receive the full 30% Investment Tax Credit (ITC), they had to start construction by December 31, 2019.
In both cases, the “start of construction” can be triggered by incurring at least 5% of non-refundable project costs prior to the deadline. There is a slight nuance for solar in that projects that incurred the 5% prior to December 31, 2019 — for example, by placing an order for solar modules — must “reasonably expect” to receive delivery of those modules by April 15, 2020.
So any covid-related delays that might prevent a wind project from achieving commercial operation by December 31 or a solar project from receiving module deliveries by April 15 could theoretically put that developer’s tax credit strategy at risk.
Do you expect the tax credits to get extended?
The industry at large, led primarily by the renewable energy industry trade associations AWEA and SEIA, had been pushing for two forms of relief: an extension of the tax credit qualification deadlines, and an ability for tax equity investors to take the tax credits in the form of a cash grant. Neither of these provisions was included in the March 27 stimulus bill, though we expect the lobbying to continue.
In parallel, there has been a separate effort led largely by the project development and finance community to request that the IRS issue clear guidance that covid-related delays to renewable energy projects will be considered an “excusable disruption.”
None of these is mutually exclusive and it’s too early to tell which might be successful, but many of the developers that LevelTen works with are actively engaged.
What would an extension mean for US companies considering renewable PPAs?
Wind and solar projects that qualify for the tax credits can offer lower PPA prices to corporate buyers. If an extension is passed, more projects will be able to qualify, which means there will be more PPAs with favorable economics. This could potentially lead to more corporate procurement.
Similarly, greater clarity on tax credit qualification rules and the ability to take tax credits in the form of a cash grant would stimulate tax equity investment. This would increase the financing pool and allow more projects to reach commercial operation.
Are low oil and gas prices affecting the business case for investing in renewable energy projects?
Fortunately, temporary economic shocks are likely to be less important than long-term energy price trends. On the LevelTen Marketplace, we run 20,000 independent Monte Carlo simulation trials on more than 750 PPA offers every day so our clients have a complete picture of how a PPA could perform over the life of the contract.
The price drops we’ve seen in the last month are within the range of values our risk analysis approach would produce. Overall, the net present value of long-term PPA offers hasn’t dropped dramatically, which has given comfort to the many corporate buyers who have decided to proceed with their procurement strategy. Corporations with renewable energy goals still see climate change as a looming threat, and remain committed to reaching their sustainability goals.
Any advice for American corporate energy managers around renewables procurement?
Although covid-19 is having a material effect on energy prices — and causing lower settlement values in the short-term — we believe it’s important that corporations and developers maintain a long-term perspective on what drives project valuation. This means keeping their eye focused on the intersection of demand growth and the cost of supply, and not on short-term disasters or their economic effects.
Climate change is still critical to long-term corporate sustainability. If a corporation signs a PPA now, the project won’t start construction until next year, when hopefully everyone is back to work. That work will not only be critical for getting our economy back on track, but also for reducing emissions in the long run.
